Pretty much everyone knew Tesla Inc. (TSLA, Financial) had a bad first quarter, even before the company reported earnings on April 24. As the company repeatedly slashed prices in an effort to juice up flagging demand, Wall Street analysts began to sweat.
Going into earnings, the consensus estimate fell dramatically as most analysts revised their expectations downward. Yet, despite facing a drastically lowered bar, Tesla still managed to fall far short.
After Tesla posted profits in both the third and fourth quarters last year, CEO Elon Musk boasted that the electric vehicle manufacturer had turned the corner to sustainable profitability. Three months later, he is singing a different tune.
In the first quarter, Tesla suffered a 37% sequential drop in revenue, which devastated its bottom line. The company posted a whopping $702 million GAAP net loss, more than erasing the positive income posted in the back-half of 2018.
The scale of Tesla’s losses were surprising, but the cause was not: It simply could not sell enough cars, despite multiple price cuts during the quarter. Deliveries of its Model S and Model X vehicles fell a staggering 45% quarter over quarter. Sales of the Model 3, Tesla’s newest product, also slowed, falling 20% quarter over quarter despite beginning deliveries in Europe and China.
Hope is not a strategy
Despite the dramatic collapse in vehicle deliveries last quarter, Tesla defiantly reaffirmed its full-year guidance. The company claims the first-quarter disaster was due principally to seasonality and logistics issues and it will still be able to deliver between 360,000 and 400,000 vehicles in 2019. Analysts are not so convinced. Indeed, one leading bull, Wedbush, has thrown in the towel:
“To this point, in our 20 years of covering tech stocks on the Street we view this quarter as one of top debacles we have ever seen while Musk & Co. in an episode out of the Twilight Zone act as if demand and profitability will magically return to the Tesla story.”
Despite being pressed by multiple analysts during the earnings call, Musk pointedly refused to address either the current order book or projected weekly order rate. To meet its guidance, Tesla will need to see an explosion of new demand. That seems more like wishful thinking than serious business strategy.
The new normal
On the earnings call, Musk claimed that demand has picked up substantially. Yet, all external evidence suggests the opposite is true. Judging from delivery numbers reported in several key European markets, there is little sign of improvement over last quarter. Karl Brauer, the executive publisher of Kelley Blue Book, offered an uncompromising take on this bleak demand situation:
“Everyone expected a first quarter loss for Tesla, but nobody expected it to be this big. What’s interesting is how there really isn’t a single, substantial factor driving this...This is the new normal for Tesla.”
For most of 2018, the media and investors were focused almost exclusively on Model 3 production. Tesla was believed to be supply-constrained. That assumption has been proven false. The “new normal” facing Tesla is not pretty, and could spell serious trouble for the company going forward.
Things look quite bleak for Tesla at present. The explosion of demand for the Model 3 after its release in late 2017 has proven to be unsustainable. The rush of orders was the product of pent-up demand and clearly not indicative of sustainable demand volume. But demand has not simply plateaued; it has fallen off a cliff. Model 3 leasing, announced this month, may help to firm up demand for a little while, but it cannot solve the broader secular decline. Despite Musk’s protestations to the contrary, it looks like weak demand is here to stay.
Tesla cannot sell its current vehicle lineup profitably on a sustainable basis. As tax credits expire and new competitors enter the electric vehicle market, Tesla will face increasing pressure to cut prices again, further diminishing its margins.Meanwhile, it is rapidly burning through cash just to keep the lights on.
Tesla’s $45 billion valuation is based on the belief that it can rapidly and profitably scale production of its current and planned products. In other words, Tesla is valued for its growth story. That story came to an end on April 24. The market has not yet fully come to terms with this fact, but it will soon enough. Mounting losses and disappointing sales will inevitably trigger a severe downward price correction.
Disclosure: Author is short TSLA via long-dated put options.
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